Issued: 5 November 2004
In "A Simpler Way to Better Pensions" in 2002, Alan Pickering identified multi-employer schemes for non-associated employers as offering the potential to increase pension scheme coverage. The National Association of Pension Funds (NAPF) also picked up on multi-employer schemes later that year in "Pensions - Plain and Simple".
These schemes give employers the opportunity to group together to offer an occupational pension scheme that as individual employers they could not afford financially or that they would not be prepared to risk offering.
Multi-employer schemes for non-associated employers are a step removed from the employer and can take away most of the hassle of providing a pension scheme. They offer a 'one-stop shop' solution for workplace pension provision, giving participating employers access to all the services, documentation, membership literature and communications required to operate and support a pension scheme.
The employer's input includes submitting forms for joiners and leavers, collecting and forwarding monthly contributions on time, and notifying the scheme's administrators of salary and data changes. The trustees and managers of a multi-employer scheme can look after everything else – including administration, dealing direct with members' queries, ensuring the scheme complies with legislation, making returns to the Inland Revenue, appointing and managing professional advisers and so on.
Trustees have a fiduciary duty to operate a scheme in the best interests of its members, but trusteeship can be onerous for a single employer scheme. A multi-employer scheme will organise trustee appointments, including elections where required, design trustee induction and training programmes and provide back-up services for trustee meetings.
As well as the savings in time and administration, using a multi-employer scheme can allow participating employers to offer a better scheme for lower costs than they could otherwise hope to achieve.
One large scheme for 100 employers and 5,000 members needs the same services as a smaller scheme for a single employer with 200 members. A multi-employer scheme can have one single, simple benefit structure; one trust deed and rules; standard member literature; one set of accounts and one annual report. Some of these costs will not vary much with the size of the scheme, so participating employers and members benefit from economies of scale.
The multi-employer approach also allows schemes to increase their purchasing power – for example in negotiating investment management and other professional fees. All told, the cost savings can be significant.
Provided the cost of the Pension Protection Fund and the combined effects of the Pensions Bill's scheme-specific funding requirements and the EU Pensions Directive do not kill off defined benefit schemes (DB) completely, the multi-employer approach could be key to the survival of DB arrangements among smaller employers in the private sector.
Deficits, MFR and FRS17 have focussed employers' attention on the risks they run in offering DB pension arrangements. A frequent reaction is to close the scheme, whether to new entrants or to further accrual, and replace it with a GPP or stakeholder, often with much reduced employer contributions. All of the risk is transferred to the member; and poor take-up of the replacement arrangements suggests it is a move from DB to nothing for many employees.
The multi-employer model may allow groups of employers to offer a defined benefit scheme – probably a very simple, low accrual career average design, without 'bells and whistles' – while managing their risks. A very prudent funding basis can help to control the risk of increasing contribution rates; if excessive surpluses arise, these can be allocated to members as discretionary benefits.
The multi-employer approach works equally well for DC schemes where economies of scale can directly benefit the members.
Given the advantages of multi-employer schemes, why are there not more of them, especially in the SME sector?
Under current Inland Revenue rules, 'centralised' or multi-employer schemes can be set up for 'associated' employers (usually companies in a group with the same parent company or shareholders) or by employers that are not associated. However, centralised schemes for non-associated employers have to fulfil more onerous requirements to gain approval.
Alan Pickering felt "legislative and regulatory encouragement of multi-employer schemes in the UK could be a means of ensuring that economies of scale and access to professional services may be extended to the small firm sector…" However, he noted the difficulties presented by a legislative and regulatory framework designed for the 'single employer – single scheme' norm.
It was therefore disappointing that there were no specific measures to encourage the development of multi-employer schemes in the Pensions Bill or the Finance Act 2004.
Over the last 18 months the NAPF's Multi-Employer Schemes Working Group has been working with the Inland Revenue and the DWP to achieve a regulatory framework to enable non-associated multi-employer pension schemes to be established under the new tax regime. The Group has addressed measures to limit cross-subsidy and Pensions Bill issues relating to the Pension Protection Fund, scheme funding and requirements to consult with employers in drawing up a model for new multi-employer schemes for non-associated employers.
A combination of the tax reforms and the NAPF's efforts could mean that, from April 2006, it might be easier to establish multi-employer schemes for non-associated employers – whether in the same industry or in, for example, geographical areas.
The industrywide model is already well established with schemes for, amongst others, construction workers, plumbers, dancers, advertisers, university staff, charities and the motor industry. However, there could be scope for more trade associations or similar organisations to sponsor multi-employer schemes for their members' employees. In the Netherlands, where industrywide schemes are popular, around 90% of the workforce has some kind of occupational pension provision.
Multi-employer schemes have flourished in Australia since the introduction of compulsory 'super' in 1992. Some of these are multi-industry schemes, including regional arrangements. Western Australia, Queensland and south Australia offer regional schemes for employers in all sectors of industry and commerce.
In the UK, associations such as the Chambers of Commerce, trades unions, the CBI and the Federation of Small Businesses could have a role to play in encouraging the roll-out of multi-employer multi-industry schemes for their member organisations.
It is clear that people need to save more for their retirement. The Pension Commission's initial report outlined 4 stark choices – retire poorer, work for longer, save more or pay higher taxes and National Insurance for better retirement benefits. The recommendations for action will follow next year, but changes to the state pension system, more compulsion and a major revitalisation of voluntary pension savings are identified as possible ways forward.
The Employer Task Force is looking at ways to increase pension coverage in the workplace. The Task Force is considering the role multi-employer pension schemes can play, and has met with representatives of several industrywide schemes as part of its fact-finding exercise. It is due to publish its report before Christmas.
The potential for further change in the pensions environment is enormous, so we may yet develop a regulatory framework that positively encourages the development of multi-employer schemes.
Setting up a new scheme is quite an undertaking. As part of its deliverables, the NAPF's Multi-Employer Schemes Working Group will produce an implementation pack setting out the basic procedures to be followed in order to establish and operate a new multi-employer pension scheme for non-associated employers. This pack will also include model documents and draft member literature.
Recognising that start-up costs will be a problem, the Group is also compiling a database of individuals and firms who are willing to assist scheme sponsors with aspects of setting up new arrangements. These include general and investment consultancy, legal and actuarial advice, trusteeship, communications, administration and accounting and audit services, among others.
The Finance Act and Pensions Bill have been criticised for doing little to extend pension saving. In the next 12 months, the Employer Task Force and Pensions Commission reports could herald a step change in pension provision in the UK.
If multi-employer schemes feature more prominently in the pensions landscape, arguments against using occupational schemes will be more difficult to sustain. Employers and employees who wish to join a multi-employer arrangement should find it as straightforward as joining a GPP or a stakeholder, with the added advantage of having trustees with a legal obligation to look after members’ best interests. Let’s see what happens.
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